Mutual funds are professionally managed investment instruments that collect money from investors and then invest in a variety of assets. At first, invest in mutual funds looks scary for newbies, however, with time, you will get used to the market’s ups and downs. 

In India, one can easily invest in mutual funds through two different ways – online or in person. In-person, however, is the traditional method where it is needed to submit an application form along with a bank draft or cheque at any branch office of the Investor Service Center (ISC) or to a Transfer Agent. 

In this digital age, the online method is the way to go. For online investments, you can either check mutual funds’ official websites or you can opt for mutual fund distributors registered with the Association of Mutual Funds in India (AMFI) just like Wealth Redefine. Continue reading this blog to learn more about the process of investing in mutual funds.

What Are Mutual Funds?

Mutual funds are one of the best ways for people with little financial knowledge to invest their savings in funds managed by expert professionals. These fund managers handle the pooled money from numerous investors to strategically buy equities and debt instruments to achieve the fund’s objective. Mutual funds are one of the most convenient and diversified methods for helping investors grow their wealth in the long term.

How Do Mutual Funds Work?

Investors with common financial objectives put their money in a particular fund handled by an Asset Management Company (AMC). This pooled money is then invested to buy assets and securities as per the fund’s investment goal. What needs to be purchased is solely decided by the fund managers. They could either invest in securities such as stocks, money market instruments, commodities, bonds, or any other assets.

You might be wondering what the AMC is getting for facilitating this service which benefits the investors in the long run. The answer is – the expense ratio, which is the annual maintenance fee that is charged by AMCs in return. Investors make money through the dividends or interest earned on their principal investment and if you don’t withdraw, then interest gets reinvested and provides you the benefits of compounding. Also, mutual funds diversify your investment across multiple asset classes which minimizes risk and provides steady income.

How Do You Invest In Mutual Funds?

Individuals can use either the online or the offline mode to invest in mutual funds. However, people nowadays prefer online mode over traditional methods as they facilitate various benefits like profit tracking, instant investment, and more just from their mobile phones. Dive into the list below to learn more about mutual fund investments and their ways:

1. Through a Mutual Fund Distributor (MFD)

AMFI-registered mutual fund distributors like Wealth Redefine offer valuable financial advice and also actively manage investors’ portfolios and transactions to facilitate better returns. In return, they do not charge any direct fees from the investor. These distributors assist investors by analyzing the risks associated with various funds and guiding them in selecting high-performing funds that have the potential to generate strong returns. On the other hand, distributors earn from the brokerage from the AMCs they are associated with.

2. Through Registered Investment Advisors (RIA)

One can also choose to go with SEBI-registered investment advisors as they help you to invest in direct plans without any AMC commissions.

RIAs (Registered Investment Advisors) may charge fees for their services. They claim this reduces conflicts of interest. This means that they will give you more honest advice since they don’t earn commissions from selling specific funds. 

However, you should always do your research before choosing an advisor. Check if they follow the rules set by AMFI (Association of Mutual Funds in India). AMFI’s code of conduct makes sure that mutual fund distributors give fair and unbiased advice. This helps protect investors like you.

3. Direct Investment With The AMC

Another method through which you can invest in mutual funds is by directly contacting a particular AMC through their websites or apps or through office visits. Newer investors need to submit their KYC documents for verification purposes. 

Experienced investors who are well versed in mutual funds and their pros and cons decide to go with direct plans as they have lower expense ratios and generate higher returns in comparison to regular plans.

4. Through Registrars and Transfer Agents (RTAs)

Another way to invest in mutual funds is through RTAs. They handle mutual fund transactions for fund houses and investors can transact in both regular and direct plans through them.

They provide multiple investment options from different AMCs. These AMCs are managed by the same RTA (Registrar and Transfer Agent). Therefore, before investing, you should always check the RTA’s website. This will help you know which AMCs they work with. It ensures you make informed decisions about your investments.

5. Invest In Mutual Funds Through Stockbrokers.

Also, you can explore stockbrokers who offer online trading and demat services for investing in mutual funds. As they are AMFI registered distributors, they mainly facilitate regular mutual fund plans to investors.

6. Bank-enabled Mutual Funds Investment.

Banks also provide options to invest in mutual funds for their account holders. While being a distributor, banks usually facilitate regular mutual fund plans either through their branch offices or through online platforms.

7. Investing Through Mobile Apps.

The most popular method of investing in mutual funds is through mobile apps offered by AMCs or RTAs. These apps have a user-friendly interface with a quick and easy onboarding process which allows investors to invest in direct plans. At the same time, they charge zero commission or a lower expense ratio as a maintenance fee. 

Furthermore, its automated features make it a go-to option for youth investors. However, one should have good knowledge of mutual funds to choose plans that align with their financial aspirations.

Cost Associated With Mutual Fund Investment.

Here are some of the most common costs associated with mutual funds. Read on to learn about them:

1. Expense Ratio

AMCs charge a short percentage of the total assets under management as maintenance fees which is also known by the term expense ratio. For direct plans, the expense ratio is usually lower than that of regular plans.

2. Transaction Charge/One-Time Charge

Investors might need to pay a small amount as a transaction fee. In most cases, if the investment is less than 10,000, there is no fee. However, this rule can vary depending on the mutual fund company (AMC). Therefore, it is always advised to check the details before investing.

3. Exit Load

Exist load is the specified amount that you will be charged by AMCs when you withdraw your investment quickly. This fee is calculated as a percentage of the scheme’s current Net Asset Value (NAV). So, the fee changes with the change in NAV.

4. Stamp Duty

Stamp duty is a tax that applies when mutual fund units are issued or transferred. This tax is charged whether the units are held in a Demat account or physical form. It is a direct tax collected by the government.

5. STT

Whenever an investor chooses to sell their mutual fund units, a Securities Transaction Tax (STT) is charged.

STT for different schemes:

Here is the list of STT for different schemes:

• Close-ended schemes and ETFs: Usually 0.001% of the traded value
• Open-ended equity-oriented schemes: 0.25% of the traded value
• Debt Mutual Fund Units: No any STT

Important Points To Consider To Invest In Mutual Funds

Next, after understanding how to invest in mutual funds and the costs involved, you need to choose the correct funds that align with your financial goals. Listed below are a few crucial points that you should consider before investing in mutual funds.

1. Investment Goals

Investors must be well aware of their long-term investment goals such that they can make thoughtful financial decisions. Be clear about why you are saving money. It could be for retirement, buying a house, or your child’s education. Knowing your goal helps you plan better and stay focused.

2. Risk-appetite

Another important factor to take into consideration before investing your hard-earned money is your risk appetite. Remember, every investment has risks. Schemes with high returns usually have higher risks. If you can take more risk and want high returns, choose equity schemes.

If you prefer lower risk and are okay with moderate returns, debt schemes are a better choice. Pick what matches your goals and comfort with risk.

3. Investment Amount

Your investment amount depends on several factors such as your financial goals, risk tolerance, investment horizon, and most importantly your current financial situation. Make sure you invest at least 20% of your income to secure your future and achieve your desired financial goals.

4. Liquidity Factors

Generally, mutual funds are liquid funds which means you can withdraw any time you feel the need. However, some mutual funds come with a lock-in period allowing you to withdraw your money only after a certain period. Therefore, it is always advisable to evaluate every factor associated with mutual funds before making any commitment.

5. Tax implications

Last but not least, make sure you learn about the various kinds of tax implications and the costs associated with mutual funds. This will help you to make thoughtful decisions while picking the right funds to reach your financial goals.

Conclusion

With so many investment options available, investing in mutual funds is one of the best and most practical ways to make money in the long run. Even those who aren’t financially savvy are choosing to invest in mutual funds to leverage their benefits, making it a popular choice for beginners and seasoned investors alike.

The key benefits of mutual funds include that they are being managed by professional fund managers and facilitate risk – diversification in one’s portfolio. However, it requires thoughtful planning and informed decision-making abilities to pick the right funds that align with your financial goal.

By following any of the above-listed strategies, you can confidently start your journey to invest in mutual funds. Keep in mind that each investor’s goal is unique, therefore take your time, research thoroughly, and seek professional help whenever you feel the need.

Also Read

• Different Types Of Mutual Funds In India
• How To Build A Mutual Fund Portfolio?
• Types of Risk in Mutual Funds
• Best SIP For Beginners In India